1.4 The Role of the Management Accountant: CIMA's View, IFAC's Domain & Position in the Organisation

Why this topic is examined

Syllabus area A1(c) asks you to explain the role of the management accountant, and A1(d) asks you to explain the relationship between the management accountant and the organisation's managers, including the IFAC definition of the domain of the professional accountant in business and the positioning of management accounting within the organisation. Objective test questions here are usually short: identify which activity belongs to the management accountant, which statement matches IFAC's view, or whether a role is a line or staff role. They are quick marks if you know the definitions precisely.

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CIMA's description of management accounting

Section 1.1 introduced the definition used in the Global Management Accounting Principles (GMAP): management accounting is the sourcing, analysis, communication and use of decision-relevant financial and non-financial information to generate and preserve value for organisations.

CIMA's Official Terminology (2005 edition), which the Certificate study materials also quote, describes management accounting more broadly as the application of the principles of accounting and financial management to create, protect, preserve and increase value for the stakeholders of for-profit and not-for-profit enterprises in the public and private sectors. It calls management accounting an integral part of management, and says it involves identifying, generating, presenting, interpreting and using relevant information to support activities such as:

Two exam points follow from this description:

1. Management accounting is not limited to costing. Planning, control, performance measurement, risk and governance all fall within it.
2. It applies to public sector and not-for-profit bodies as well as companies. A hospital trust or a charity needs budgets, costing and performance measures just as a manufacturer does.

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IFAC's view: the professional accountant in business

The International Federation of Accountants (IFAC) is the global organisation of professional accountancy bodies. Its Professional Accountants in Business (PAIB) Committee published an information paper, The Roles and Domain of the Professional Accountant in Business, to explain what accountants employed inside organisations do. IFAC's own summary of the paper lists roles that include:

• implementing and maintaining operational and fiduciary controls;
• providing analytical support for strategic planning and decision making;
• ensuring that effective risk management processes are in place; and
• assisting management in setting the tone for ethical practices.

The key word is domain: the professional accountant in business works inside the organisation, as an employee or manager, rather than providing external services such as audit to clients. The domain therefore covers everything from recording transactions and producing management information through to strategy, risk and governance.

IFAC's four stages in the evolution of management accounting

An earlier IFAC statement, Management Accounting Concepts (1998), described how the focus of management accounting widened over time. Study texts summarise it as four stages:

Each stage adds to the earlier ones rather than replacing them. A modern management accountant still determines costs (Stage 1) but is expected to contribute to value creation (Stage 4).

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Where the management accountant sits in the organisation

Line and staff roles

• A line manager has direct authority over operations and is accountable for results, such as a production manager, a sales manager or a branch manager.
• A staff (advisory or support) function provides expertise and information to line managers but does not command their operations.

The management accountant is usually a staff role. The production manager decides how to run the factory; the management accountant provides the standard costs, the variance analysis and the explanation of what the numbers mean. The management accountant does have line authority inside the finance team (for example, over the cost accounting staff they supervise).

The finance function

In a typical company the finance function reports to a Finance Director or Chief Financial Officer (CFO) and contains several specialisms:

Many organisations now move routine transaction processing into shared service centres and place management accountants alongside operational teams as business partners. The business partner spends less time producing reports and more time interpreting them with managers.

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The relationship with managers

The relationship works in both directions:

• Managers to the management accountant: managers explain their objectives and decisions, supply operational data (hours, volumes, capacity) and say what information they need.
• Management accountant to managers: the management accountant provides relevant, timely information, explains variances and trends, models the consequences of alternatives, and challenges assumptions.

Good practice depends on:

1. Understanding the business. Numbers are only useful if the accountant understands the operations that generate them.
2. Communication. Information must be presented in a form non-financial managers can use, the first GMAP principle.
3. Objectivity. The management accountant supports managers but must not bend figures to suit them. The CIMA Code of Ethics (Section 1.5) requires integrity and objectivity even when a manager's bonus depends on the result.
4. Clear decision rights. The manager decides; the management accountant advises. If the accountant starts making operational decisions, accountability becomes blurred.

Worked scenario

A regional hospital's management accountant is asked by the outpatient manager whether to open a Saturday clinic. The accountant:

• identifies the incremental costs (extra staff hours, heating, cleaning) and the activity the clinic would add;
• ignores the share of the hospital's central administration that would be charged to the clinic, because it would not change;
• shows the cost per additional patient appointment and the effect on the department's budget; and
• explains the assumptions and risks.

The outpatient manager, a line manager, makes the decision. The accountant's role was analytical support and information, exactly as IFAC and CIMA describe.